The Housing Bubble

The Santa Rosa Press Democrat reports on home lending from California. “Gren Clarence and Shidler, like two out of three Sonoma County home buyers and owners, joined the fast-growing club of borrowers in high-cost housing markets who financed purchases and home equity loans with low-payment mortgages that explode into much higher payments within a few years.”

“Now, the first wave of borrowers faces a costlier mortgage bill. Some will be in over their heads if they can’t afford to pay more. Darren Seliga is busy working with clients who need to refinance and figure how to budget $350 to $650 or so more for monthly house payments. ‘My job is to find a creative way to get them into something and help them find something different down the road,’ the Santa Rosa mortgage broker said. ‘Sooner or later you’ve got to face the music or sell the house.’”

“The ritual of creative financing to keep payments low, followed by a new round of financing in an attempt to stay in a home, has High housing costs are constantly shifting the bedrock beneath a home that serves not only as a shelter but as an ongoing investment. ‘I’m just hoping this all works out for me. It’s always a risk. But you’ve got to take some chances,’ Gren Clarence said.”

“‘It’s already started. I think it’s going to go for a while because we’ve made so many loans on that interest-only product,’ said Randy Blankenbaker, for Chase Home Mortgage. They account for two thirds of all purchase and refinance loans in Sonoma County, compared to a quarter of loans three years ago—and have supplanted long-term, fixed-rate loans.”

“‘Sooner or later, they’ve got to pay the true cost of a loan,’ said John Klein, branch manager for Charter Funding in Santa Rosa.”

“Gren Clarence bought a $500,000 home and put 25 percent down. ‘That’s how you maximize your savings. Yet you’re gambling,’ Gren Clarence said. ‘This is all just cross our fingers and hope it works she said.”

“‘It’s a smart thing to do if you’re responsible with your money,’ Shidler said. Shidler used one to refinance his Santa Rosa home five years ago. The $800 a month he saved with the minimum payment went into investments and to buy rental property out of state. Two years later, Shidler refinanced again, this time to pull out equity for home improvements. This option mortgage saves about $700 a month.”

“For Shidler, the first option mortgage added $1,500 a year to the loan. His current one adds $4,000 a year. ‘The option ARM was really sweet. But I didn’t like the way it was going up,’ he said.”

From the Reporter. “One of the byproducts of the frenzied pace and appreciation that marked the previous real estate cycle was a proliferation of ‘piggyback’ loans. Some of those piggybackers, namely those unprepared for the ramifications of a slowing housing market coupled with newly adjusting rates, are beginning to find themselves without a financial leg to stand on.”

“‘Of all the escrows that closed in ‘04 and ‘05 in all of Solano County, I bet you that 40 percent of the escrows that closed were situations that wouldn’t have qualified in 2000,’ reflected loan officer Jim Porter. ‘That’s testimonial to how easy it is to buy a house today. The loan products have changed, and the mortgage companies and the banks have become hyper-aggressive, hyper-competitive.’”

“‘Borrowers may not be prepared for the increased payments they will face as interest rates rise,’ said the PMI study’s author, Charles A. Calhoun.”

“Piggyback loans, he said, initially ‘appear to support a rapid rise in housing values by qualifying borrowers for larger loans at higher loan-to-value ratios; but I expect that as interest rates rise and house price appreciation slows or declines, defaults will rise and borrowers could lose their homes. It’s particularly worrisome given that borrowers may not fully understand the risks they face.’”

“Realtor Kathy Shuster of Vacaville agreed. ‘Clearly, 100 percent financing is more popular, (because) people don’t have the money to put down,’ she said. ‘It’s allowing people to get into properties they otherwise couldn’t. But if you owe 100 percent, and the values drop as they have, you’re in trouble.’”

“Even borrowers who took out mortgages five years ago are being adversely affected, explained Porter. ‘Customers that have these really high mortgage loans and high payments are starting to stress a little bit, and maybe even fall behind,’ he said. ‘That was OK in ‘03 and ‘04 - ‘05 even, because if they started to fall behind, they had 50 percent equity increases because of the huge appreciation in ‘03 and ‘04.’”

“That allowed for them to borrow against the home’s equity, Porter said. ‘So many people are robbing Peter to pay Paul. (But) if they owe $500,000 against their house and it’s only worth $500,000, they can’t borrow against their house.’”

“Because of such situations, particularly where homeowners end up owing more than their home’s value, some Realtors foresee an increase in short sales, in which a home is purchased for an amount less than the debt owed by the seller. Solano-based Kappel & Kappel Realtors, for example, recently held an educational seminar on short sales for its agents.”

In Business Las Vegas reports on the homebuilders. “In a sign the housing market continues to soften, Las Vegas Valley homebuilders are backing out of land deals as home sales remain sluggish. Centex Homes, which has trimmed its staff by layoffs and voluntary resignations, announced Sept. 14 that it has relinquished various options on land holdings.”

“‘It’s no secret that the housing market is in transition,’ Centex said in a prepared statement. ‘As a result, we’ve adjusted sales volumes to meet current demand and have relinquished various options on certain land holdings, which are projected to no longer meet the demand previously anticipated.’”

“New home closings have fallen four of the last five months as builders turned to swimming pools, washers and dryers and other incentives valued at tens of thousands of dollars to boost sales. Builders have continued to cut back on permits, taking out 40 percent less in August than August 2005.”

“Developer John Ritter said he’s aware of builders, whom he declined to name, who aren’t going forward with existing options or escrows in some cases worth several hundred thousand dollars or more. Ritter called it short-term phenomena triggered by an oversupply of homes, both new and resale.”

“Housing market analyst Steve Bottfeld said he believes the cut back in land holdings is significant. If Centex is cutting back, than virtually everybody is, Bottfeld said.”

“‘We are in the beginning of a market correction, and the builders are leading that market correction,’ Bottfeld said. ‘The market can’t sustain excessive growth, and we have been in excessive growth mode for the past 12 months. The builders are reducing their exposure as the market cools and are pulling back to more realistic levels of inventory for which they can sell.’”

“Monica Caruso, spokeswoman for the Southern Nevada Home Builders Association, said five to six builders, whom she declined to name, have had layoffs over the last several months. That’s not unexpected given that sales are down and customer traffic isn’t there, so builders need fewer employees, mostly in sales, she said.”

The Review Journal. “Las Vegas housing analyst Dennis Smith expects to see some fairly significant price cuts in the resale segment of the market in the next few months to move some of the 20,384 homes listed for sale in the valley.”

“The number of existing home sales dropped in August to 3,641, compared with 5,786 in the same month a year ago.”

“‘In resales, buyers are reluctant to give up the gains they’ve absorbed over the past few years,’ Smith said. ‘What they don’t understand is that’s paper gain. If you’ve got a house that’s been on the market for six months, you’d better adjust the price downward. It’s going to happen. People will have to lower prices.’”

“Look for home builders to take advantage of lower material and labor costs over the next few months and reduce home prices in new subdivisions, Smith said.”

“‘What we’re seeing with new homes is the cost to build is going down because as sales decrease, subcontractors lose work. If subcontractors lose work, they lay off people or they’ll lower their price to get more business. If that’s the case, the builder will offer more space at a lower price per square foot,’ he said.”

“‘New home permits have been falling as the market begins to adjust to shifting economic conditions,’ SalesTraq President Larry Murphy said. ‘The incredible reduction in permit activity over the last four months strongly suggests that builders are responding to a market correction.’”

“‘Speculators are now selling to end users, so that’s helping the apartments,’ broker Christopher Bentley said. ‘We saw the single-family homes and condos as a shadow market because they were competing with us. Now with the resale homes..40 percent are vacant now that speculators are selling houses and no longer renting them.’”

Readers suggested a topic around Fed policy and the housing bubble. “Will the Fed lower interest rates to bail out FBs and lenders?”

A reply, “It won’t help. Home prices are falling already and I believe that incomes must catch up.”

Another, “I believe that incomes cannot catch up. Too much outsourcing is happening to places where the pay is 1/2 the American wage. The only way to get home price/income ratio back to normal is for home prices to fall (50%+ in my neck’o’the’woods).”

Another looks at the wider picture, “They will say for as long as economically possible that inflation is a risk. They’ll do this to keep foreigners funding our debt with the possibility of higher rates. When it becomes apparent to everyone that the debt in housing can’t be serviced at these low rates, then they’ll cut them.”

“Deflation (happening now) followed by inflation. It is what has gone on for generally the last 35 years. The difference now is the time lapse between the two (almost occuring together if that is possible…or at least deflation happening with the FED TRYING to encourage inflation).”

“The FED cutting rates and people taking out more debt to purchase homes is a different story. However, it will make speculators in other areas (equities) more apt to start the inflation of other assets more probable.”

The Chicago Tribune. “Concerns about the housing sector moved back to center stage Wednesday after the Federal Reserve drew attention to the sector in its latest policy statement. In deciding to keep short-term interest rates unchanged, the Fed stated, ‘The moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market.’”

“The Fed’s previous statement, in August, expressed a less focused concern: ‘Economic growth has moderated from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.’”

“Deletion of the word ‘gradual,’ regarding the housing slump and removal of ‘interest rates’ and ‘energy prices’ as additional factors in the economic slowdown put the spotlight on housing.”

“Unless you simply want to recoil emotionally from headlines about a bursting housing bubble, the Fed’s statement Wednesday represents the beginning, not the end, of your thinking.”

“The downturn in housing has not been gradual, as the Fed acknowledged, but is it nearly over? The bulge in inventories of unsold homes ‘would suggest an even larger decline over a longer period of time,’ says an analysis by Ray Stone.”

“The contagion of a housing slump on the rest of the economy is unclear. Paul McCully at bond investment giant Pimco, called the housing trend ‘a recession,’ but adds, ‘The housing recession is not the stuff of an economy-wide recession, unless it tips the consumer animal spirits into a recessionary funk.’”

“Jobs related to the housing industry are in danger, creating a multiplier effect as laid-off construction and mortgage finance workers curtail their spending. ‘Based on the decline in [housing] units under construction, it appears as if between 50,000 and 100,000 construction workers will be laid off in the quarters immediately ahead,’ wrote economist Stone.”

The LA Times. “The weakening housing market continued to take its toll on the industry Thursday as mortgage lender Countrywide Financial Corp. disclosed the possibility of thousands of layoffs and builder KB Home reported slowing revenue growth.”

“Calabasas-based Countrywide said it would reduce its general and administrative staff by 5% to 10%. Countrywide has about 13,000 employees in Southern California, including salespeople at call centers. Its other major employment centers are in the Dallas area, with 10,400 employees, and the Tempe-Chandler area of Arizona, with more than 5,000 workers, spokesman Rick Simon said.”

“KB Home also said home orders in its U.S. and French markets plunged 43% from last year’s third quarter. On the West Coast, orders plummeted 58%. CEO Bruce Karatz said the results ‘reflect the challenging operating environment for the home building industry.’”

“‘We do not expect conditions to improve significantly in the foreseeable future,’ Karatz said in a statement.”

The Chicago Tribune reports on condos. “So far the housing slump has been marked by slowing sales. Now there are signs that rapidly falling prices could be on the way. Earlier this month a Chicago developer sold 150 condominiums in a two-hour lottery by discounting prices about 20 percent from what he would have asked last spring, an indication that industry observers say could signal widespread price reductions here and around the country.”

“‘We’re responding to a dramatically changed market,’ said Nicholas Gouletas, who plans to conduct lotteries to sell about 2,000 more units in nine other projects he is developing in Chicago, Las Vegas, Orlando and Boynton Beach, Fla. ‘Let’s admit it’s a buyer’s market and what they want is the best price they can get.’”

“Gouletas figures he will avoid the expense of 2 1/2 years of mortgage interest payments, marketing, maintenance, insurance and taxes by not struggling to sell condos against the headwinds of a slowing housing market.”

“For those anxious to assess how far the decelerating housing market will fall, a lottery sale like this could indicate a steeper decline in prices as veterans in an industry replete with optimists head for the exits to salvage profits and avoid big losses.

“The distress reflected by Gouletas’ lottery here is not an isolated incident of one unlucky project in a so-so location. In New York and Washington other developers are abandoning plans to convert big apartment buildings into condos.”

“A day after Gouletas’ lottery the nation’s largest apartment real estate investment trust closed on a $96 million deal to buy a 256-unit apartment building in suburban Washington from a developer whose condo conversion plan evaporated. The REIT plans to close soon on the $200 million purchase of a 300-unit building in New York that met the same fate.”

“Prices for these apartment buildings probably have fallen about 20 percent from their peak in the summer of 2005, said Jonathan Litt, senior real estate analyst for Citigroup Investment Research in New York. Nationwide, profits for condo developers have fallen from 50 percent to ‘20 percent for some, and for many to zero or less,’ Litt noted.”

“Chicago condo developers face some rough times ahead, Litt added. ‘This has been on the radar screen for a couple of years because developers have brought on a lot of inventory,’ he said.”

The New York Times. “As housing sales soften in some areas, rentals are beginning to look good to sellers who do not want to cut prices. Owners who have properties that might have listed for $1.5 million a year ago may now have to lower the asking price to $1.1 million to make a sale, and so they rent instead. ‘People are not willing to take the hit,’ John Pfeiffer, who handles executive relocations said.”

“‘Over the last four months, I’m seeing two things,’ said Alix Sara Prince, of Sotheby’s International Realty in Rye, N.Y. ‘Those who want to wait out and rent until the market recovers, or those who are strapped because they have to leave town and put their house up for rent.’”

“Ms. Prince says she has 13 homes available for rent at $11,000 to $35,000 a month in the three towns she serves in southern Westchester County, almost twice as much in that price range as last year. Quite a few rentals, she said, are sitting around unrented.”

“Sheldon Dubrow, who is also a builder, is not getting any bites on a $1.99 million home he owns in Brookline, Mass. Now he’s hoping that he can rent it for $8,500 a month. Dubrow put his 4,500-square-foot house on the market almost a year ago. He has lowered the price once, but still, buyers are not pouring in.”

“In June, when his real estate agent ‘talked to me about renting, I wasn’t too excited,’ Mr. Dubrow said. But his attitude has changed.”

The St Petersburg Times reports from Florida. “Home auctions are on the rise across the Tampa Bay area, bringing into bloom one of the free market’s oldest price-setting methods. For Nancy Zwart, taking ads out to sell her Heritage Pines home in northwest Pasco County amounted to nine months of nothing.”

“‘A couple of people looked at it,’ Zwart said. ‘One man made an offer, then changed the settlement date 44 times.’ Frustrated, Zwart and her husband turned to Pasco-based North America Auctioneers. They hoped the home auctioneer would get them $250,000 for their three-bedroom house. They got $235,500, and were grateful.”

“‘Last year I was getting 10 calls a week,’ said Michael Peters, president of Clearwater’s American Heritage Auctioneers. ‘This year, I’m getting 10 to 15 calls a day.’ There is a catch: Houses may come in at a price lower than what the seller hoped for, underscoring the market’s appetite in an immediate and often sobering way.”

“Things don’t always work out, though. Peters’ auction at Richey Drive ended without a sale. After one property undersold by about $25,000, the seller changed his mind and placed a minimum price on a second property. ‘Sellers are not always going to get what they think they are going to get,’ Peters said. ‘But they weren’t going to get it (by a regular sale) anyway.’”

“‘We are not a magic bullet for moving the market,’ cautioned Bill Holloway of Bay Area Auction Realty in Pinellas Park. ‘A lot of sellers still haven’t come to grips with how the market has changed.’ Holloway said the number of calls he has received this year has quadrupled.”

“In the rise of the home auction, auctioneers are noticing another trend, the speculators are gone. Through the 1990s and until 2001, Peters used to only get bidders whom he describes as ‘end users.’ Then, as the stock market boom faded, speculators who turned to real estate started to pack his crowd. But by January this year, the ‘flippers’ started fading out, he said.”

The Sun Sentinel. “The Victorian-era home on Lake Cherokee will be auctioned off next month to the highest bidder. And to ensure lots of interest, no minimum bid is required, said auctioneer Alan Frenkel. ‘That makes it exciting,’ Frenkel said. ‘It sends a message to the public that it’s a fair-market-value sale. That motivates the market.’”

“The house was listed for sale at one point last year for more than $1.5 million. The home failed to sell last year as a regular real-estate listing, despite the area’s record-hot market, so the owner now is ready to settle for whatever the auction will bring, Frenkel said. ‘There are nine or 10 months’ worth of homes for sale’ in the Orlando area, Frenkel noted. So using an auction for an unusual property tells potential buyers ‘the seller is beyond motivated,’ he said.”

“Orange County property-appraiser records show that the home was bought in 2001 for $650,000 and now has an estimated market value of at least $1 million. The property was last listed for sale in early 2005 at $1.59 million, according to local MLS records. Realtor Darryl Hunt, who specializes in downtown Orlando, said he is stumped as to why the property never sold last year at that asking price, which was down from $2.1 million in an earlier listing.”

The New York Times. “As housing prices shot up in recent years, ARM’s gave borrowers a way to jump into the market while paying only a fraction of the interest that traditional mortgages require, at least for the first few years. But the risk they took now haunts millions of borrowers, who have seen their monthly payments skyrocket.”

“Stephen Parnell, CEO of the Lynxbanc Mortgage in Boca Raton, Fla., said some of his clients had taken out so-called ‘option ARM’s. ‘Some people are taking that short-relief pain pill in a last-ditch effort to stay in the house,’ Mr. Parnell said. ‘Their hope is that the real estate market in the next two to three years will be kinder to them.’”

“Others are in more desperate situations. Mr. Parnell used an example of buyers who had used ARM’s to buy homes in new developments last year, only to be facing payments they cannot afford. They would sell their houses to rid themselves of the loan, but the builders in those developments are selling off the last of their new homes for much less than what buyers paid last year.”

“One such owner, who requested anonymity rather than risk the embarrassment of exposing a financial blunder, bought a house in Port St. Lucie, Fla., as an investment in April of last year and financed the $410,000 purchase with an ARM, with an introductory rate of nearly 7 percent.”

“The loan was an afterthought, since he expected to sell the house almost immediately for a profit. He didn’t, and now the developer recently sold a similar house in the neighborhood for $325,000.”

“‘I just didn’t know what I was doing, and I shouldn’t have done it,’ said the man, who does not have enough equity in the house to refinance and who will run out of money to pay the mortgage in 10 months.”

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